Regulating for market stability

THE SEBI'S DECISION to remove all broker-directors from the governing council of the Bombay Stock Exchange (BSE) appears drastic to some and desperate to others. Though contrary to popular perception, those views have merit. It is drastic because there have been medium range plans to corporatise the exchange and place it under sound professional managers. That goal could be better achieved through other means such as by setting up a time-table. In the event, a major decision such as this one has been construed as a desperate fire-fighting act, another in an increasingly long list of apparently adhoc moves. Far from bringing about a modicum of stability to the bourses, it aggravated the negative sentiment alarmingly. On Tuesday morning stock prices were heading for a free fall and the benchmark index, the Sensex, fell by an unprecedented 300 points early on. That such spectacular losses are accompanied by extreme volatility is especially disconcerting.

The Finance Minister has announced in the Rajya Sabha a more comprehensive plan to restore investor confidence. Not surprising at all, none of his action points are original but given that past piece-meal measures have back-fired it is hoped that they will be implemented in full. An overhaul of the supervisory structure of country's oldest stock exchange and arguably the most visible of all its financial institutions is necessary. Quite inexplicably - this has been common knowledge - the firewalls between the stock market professionals and influential broker-directors exist only on paper. For the second time in less than three years a BSE President had to go under a cloud. The allegation that Mr. Anand Rathi was privy to certain sensitive information which he manipulated may or may not stand legal scrutiny but the fact that such charges are occurring so frequently cries for a change at its top echelons. If price- rigging continues to be the bane of our bourses, much of the blame ought to be placed on governmental inaction. For now there is one more strong reason to insulate the management of BSE from the supposedly ornamental role of its President and broker- directors. The National Stock Exchange (NSE) which was set up in the wake of previous crises in the BSE has clearly demonstrated what professional leadership can do to the stock market culture. On its part the BSE too has adapted well in key areas, for instance in technological absorption. Equally relevantly neither the market volatility of the recent past nor the controversy surrounding its high- profile President and some other office- bearers have led to a collapse of the payments system. Those impressive achievements notwithstanding, there has been no case whatsoever to persist with the statusquo.

Leaving aside the specifics for the moment, the cause of investment would be better served by understanding the stock markets in their correct perspective. Only then can the exaggerated self-defeating responses to market behaviour be avoided. For instance, the present crisis has its origins in the wrong belief that the perverse market movements wiped out the gains of the latest Union budget. All the headline-grabbing news of the week - the notorious bear hug, the melting down of technology stocks following the Nasdaq's lead, price-rigging before the merger of two banks, the broker-banker nexus - all gained riveting attention only because of the disappointment over the post-budget price movements. Both investors and policy makers need to be educated to avoid the customary hype and understand the limitations of the markets. The Government and the SEBI will do well to convert the threat from the latest crisis into an opportunity by initiating proactive action.

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Section  : Opinion
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